Rent or Buy a Home? Answer in Most Cities Is Clear

Even as home prices edge higher, buying remains a better bargain than renting in most cities, according to an analysis by Zillow Real Estate Research.

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The housing recovery we've been hearing so much about is real - but it's got a long, long way to go.

We learned last week that home values as measured by the widely tracked S&P/Case-Shiller indices climbed again in September, stretching the streak of price gains to half a year. The composite of prices in 20 cities rose 0.4 percent from August and 3 percent year over year. "With six months of consistently rising home prices, it is safe to say that we are now in the midst of a recovery in the housing market," David M. Blitzer, chairman of the index committee at S&P Dow Jones Indices, noted in a release last week.

But while sales of existing homes rose sharply in October, sales of new homes last month were weaker than expected, and the new-home sales figures for the previous three months were all revised lower. "This was a disappointing update," IHS Global Insight economist Patrick Newport said. "It indicates that demand for single-family homes is only slowly picking up, not accelerating, as the data previously showed. It also indicated that builders may have jumped the gun a little by accelerating the pace of construction of single-family homes."

Still, the overall picture looks promising, even if we're not in a full-fledged real estate boom. While prices have been edging upward, foreclosures are falling, according to tracking firm CoreLogic. Completed foreclosures in the U.S. fell from 70,000 in October 2011 to 58, 000 in October 2012. About 1.3 million homes remain in the foreclosure pipeline, down from 1.5 million a year earlier. "A lower foreclosure inventory is a good indicator of improving housing markets," CoreLogic president and CEO Anand Nallathambi said in a statement accompanying the monthly release. "The downward trend in foreclosure inventories over the past year is yet another signal that a recovery in housing is gaining traction."

Even as home prices edge higher, buying remains a better bargain than renting in most cities, according to an analysis by Zillow Real Estate Research (NASDAQ:Z). Zillow's analysis factors in all the costs of buying and renting the same home to determine a "breakeven horizon" - or how long it would take for buying to be a better deal than renting. As of the third quarter of 2012, the analysis found that buying beats renting in 59 percent of markets after just three years or less.

Average rents nationwide came down a bit from September to October, Zillow reports, but they are still 5.4 percent higher year over year, compared with a 4.7 percent increase in home values. Zillow is forecasting that home values will rise 1.5 percent from October 2012 to October 2013.

"I think it is a great time to buy," says Zillow economist Svenja Gudell. "It's really affordable. Prices have come down so far since the peak that a lot of markets that used to be extremely expensive are actually now somewhat affordable. Pair that with really low interest rates and you get a recipe for what has become this really low breakeven horizon" in most metro areas.

Buying in Detroit, for example, would pay off in less than two years, the fastest among 30 major cities. In the New York area, on the other hand, buyers would need to stay in their home for almost five years before they came out ahead of renting. Gudell says it's important to drill down to specific locations because the breakeven horizon can vary substantially in any given region. And red areas on the map don't necessarily indicate housing is more expensive on an absolute basis than areas swathed in green, just that it takes longer for buyers to beat renting.

Use Zillow's map to determine whether it's better to buy or rent in your area:

Editor's Note: This article by Yuval Rosenberg originally appeared on The Fiscal Times.